Question

The operations vice president of Security Home Bank has been interested in investigating the efficiency of the bank's operations. She has been particularly concerned about the costs of handling routine transactions at the bank and would like to compare these costs at the bank's various branches. If the branches with the most efficient operations can be identified, their methods can be studied and then replicated elsewhere. While the bank maintains meticulous records of wages and other costs, there has been no attempt thus far to show how those costs are related to the various services provided by the bank. The operations vice president has asked your help in conducting an activity-based costing study of bank operations. In particular, she would like to know the cost of opening an account, the cost of processing deposits and withdrawals, and the cost of processing other customer transactions.

Answer 1

Step 1: In order to conduct Activity Based Costing (ABC), the first step is to identify the cost pools. These cost pools will include list of operating expenses such as Teller's wages, Assistant managers salary, Branch managers salary, etc

Step 2: Identify the cost drivers. That is, in this case, 'new accounts opened', 'deposits/ withdrawals processed' and 'other customer transactions processed'. Further, also determine the number activity in each of the drivers. for example, the number of new accounts opened were 50, the number of deposits/ withdrawals processed were 500 and other customer transactions processed were 1000

Step 3: Identify the proportion of individual cost pool that pertains to each of the cost drivers. for example, the teller spends 50% of time in processing deposits and withdrawals, and 50% of time in processing other customer transactions. Similarly, the assistant manager spends 60% time in opening new accounts and 40% time in processing other customer transactions, and the branch manager spends 40% time in opening new accounts and 60% time in processing other customer transactions

Step 4: Allocate the amount in the individual cost pool on the basis of the proportion identified in step 3 above. for example, the the Teller's wages were $5000, Assistant managers salary were $10000 and Branch managers salary were $15000. Therefore, these expenses will be allocated as follows:

Particulars	Amount	processing deposits and withdrawals	opening new accounts	processing other customer transactions
Teller Wages	5000	2500 (5000 * 50%)		2500 (5000 * 50%)
Assistant managers salary	10000		6000 (10000 * 60%)	4000 (10000 * 40%)
Branch managers salary	15000		6000 (15000 * 40%)	9000 (15000 * 60%)
Total Expenses (sum)	30000	2500	12000	15500

Step 5: Use the following formula to determine to ABC:

ABC = total expenseinactivity costdriver

Therefore, as per our example above, the individual ABC is as follows:
Cost of opening new account:

ABC = 12000 50 -= 240

Cost of processing deposits and withdrawals:

ABC = 2500 500

Cost of processing other customer transactions:

ABC = 15500 1000 = 15.5